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Financial Advisers Deliver Dreary News to Pittsfield Officials
By Andy McKeever, iBerkshires Staff
03:53AM / Friday, April 29, 2016
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Finance Director Matthew Kerwood addressing both the City Council and the School Committee on Thursday night.


Kerwood said the city needs to take a variety of actions to solve its financial crisis. 
PITTSFIELD, Mass. — The City Council and the School Committee on Thursday were shown just how bad a shape the city's finances are in.
 
"There is no doubt that we have some legitimate challenges with our financial condition. I think tonight's presentation was meant to be an honest look at what those challenges are and set the framework for the need for all of us to work together in a variety of ways to address this issue," Mayor Linda Tyer said.
 
"There is no one single, simple solution. While people want to see reductions in budgets, and that's one way at addressing it, but we also need to chase down new growth and increase local receipts."
 
The two groups heard from Finance Director Matthew Kerwood, Board of Assessors Chairwoman Paula King, actuary Michael Frank  of Aquarius Capital Solutions Group and auditor Thomas Scanlon of Scanlon & Associates. All of them said something needs to change to address the looming troubles. Particularly striking was Scanlon's report that showed the city has dwindling reserves and is running short on the ability to tax. 
 
"The No. 1 asset municipalities have is the ability to tax," Scanlon said.
 
Cities are restricted in the ability to tax by two methods — the tax levy and the tax ceiling. The limit is calculated by adding 2 1/2 percent and calculated new growth to the previous year's levy limit. The ceiling is taking the previous year's total taxable value and multiplying that by 2.5 percent, a restriction in place to ensure that no more than a quarter of the total property values are being taxed. The total taxable values have been stagnant and now the ceiling is lower than the limit. Scanlon said of the 80 communities he audits, only three are in that position.
 
What that means is the city can only has raise $6 million more in tax revenue without a Proposition 2 1/2 override. The only way to increase that number is to have significant growth in taxable properties — such as a boost in the $70 million range.
 
"It would have to be a major business coming in," Scanlon said. 
 
Property values, however, have been going the other way. Since 2010, the city has lost $129,241,083 in taxable values, according to King. 
 
She said Pittsfield finances did not feel the recession until 2011. Prior to the housing market collapse, King said a number properties were bought up by out-of-town investors. When the market crashed, many of the properties were left to fall into disrepair. She also saw a trend in vacant commercial spaces because of increased home-based business, online shopping, and a commercial tax rate double that of other communities in the Berkshires. 
 
"We've slowly chipped away at this and now we are at about $3.3 billion in value," King said. 
 
Residential values dropped since 2010 by $138,509,150, she said. Commercial properties are down by $11,896,751, and personal property values by $6,925,260. Industrial values increased but that was because an appellate court case moved some value from the personal property line to industrial, King said, so it wasn't actually an increase in value. 
 
There is some good news. Between 2015 and 2016, residential values did show a slight uptick.
 
"We anticipate that may happen again in fiscal '17. We are seeing it trend in a positive direction," King said.
 
In each of the last two years, the city's budget increased by about $4 million. Another year with that type of increase will dig deep into that remaining $6 million taxing ability. Already the School Committee is eying close to a $2 million increase in its budget.
 
Tyer said she doesn't know what the budget will be this year as departmental requests are expected this week. From there, she plans to gather all of the department heads together to work out a number.
 
"I think until I can see every department, the full context of the municipal operating budget, it is hard to say where I am going to land. I have priorities in mind, things where I want to make investments. I'm not willing to let go of that just yet," she said.
 
Kerwood said the major budget drivers are human capital (benefits and pension) and state and federal mandates (such as providing special education services) and the city's long-term debt. 
 
"Our total long-term debt aggregate amount is $95,398,172," he said, adding that the number is in line with other communities Pittsfield's size.
 
Kerwood said there are some debt items coming off the books this year and some bonds from 2008 are being refinanced to save the city an estimated $400,000. The Taconic High School project will be bonded in the coming years, some of which is already on bond anticipation notes, and Kerwood said he is developing a strategy for that financing package. Kerwood guaranteed that the Taconic High School project will cost less than the City Council allocated for it.
 
"Without substantial growth in the tax base, the levy ceiling will be driving the bus for a long time," Kerwood said. "We need to put in strategies that foster growth to get us to a point where the levy limit is the driving factor."
 
Kerwood also said state aid and local receipts have been remaining flat in recent years.
 
Without the ability to tax, the city loses flexibility and bond companies take that into account. To help provide more flexibility, Scanlon says the city needs to up its reserves. Currently the city's stabilization account has just $1.8 million.
 
"You've not had significant contributions to it in the last five years. One of the things we are recommending is to apply to that," he said.
 
The city does have a good amount of free cash, which is unrestricted, at $5 million. However, in recent years, the city has been using that to offset tax increases, which essentially is funding operations. Scanlon said the "non-reoccurring" funds should not be used to fund operations but instead should be there for one-time expenses such as capital items. 
 
In total, the city has about $8.5 million in total reserves right now, well short of the 10 percent of the total budget Scanlon suggests. 
 
"I'd like to see you put another $6 million in it to get you to 10 percent in total reserves," he said.
 
Tyer said there is $1.6 million in stabilization funds controlled by the state that she is hoping will be released, a number that was factored into Scanlon's $8.5 million in reserves. Scanlon says if that money is released, it should go into the general stabilization account. 
 
The city also needs to start building funds through the other-post employment benefit trust fund the council approved two years ago. Recent accounting changes require accounting for the total liability for employees benefits through retirement. With more than 2,000 active retirees as well as a current slate of retirees, actuary Michael Frank said the city has $234,506,629 in unfunded liabilities for those benefits. 
 
"Now if you have 1,400 actives, those actives from the day they start are accruing liability," Frank said.
 
The trust fund has some money allocated into it. The retiree benefits are currently paid out of the budget and the goal is to build the trust fund up when those benefits can be paid out of the fund instead of the operating budget. 
 
Much of the news was presented to the council previously, but the two-hour presentation made even more of an impact on some of the councilors. 
 
"This time, if the budgets don't come before me with reductions I will make reductions," Councilor at Large Kathleen Amuso said.
 
Ward 2 Councilor Kevin Morandi called the presentation "an eye-opener" and joined Amuso's calls to make cuts to the budget. Particularly, Amuso and Morandi said when staff leaves, many of those positions should not be filled. 
 
"Nobody wants to see employees leave but we have a city to run," Morandi said.
 
He added he'd like to increase the percentage employees pay for health care, halt raises, and streamline what he calls "duplication of services" in the city and school sides of operations. 
 
The mayor doesn't feel the city can simply cut its way out of the problem. She says it will take a mixture of budget reductions, increased local receipts, more state aid, and increased taxable properties. She said her administration has already lobbied for the $1.6 million for stabilization, received a $25,000 grant through the state's Community Compact to bring in best practices for finances, and refinanced debt.
 
"Simple cuts to everything is not the solution. I'm not one of those who think this is the time to just disinvest in this community," Tyer said. "It is not reasonable to expect cuts when we want to grow. So how do we make those investments without exceeding our taxing ability or the ability of the community to pay?"
 
She says she'll be crafting a "variety of strategies" to address the situation.
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